BMO: Canada real estate market heading for bubble—but not Toronto

A new report out from BMO Capital Markets suggests that Canada is in increasing danger of a housing price collapse—especially if prices keep going up. The good news for Toronto is that while other provinces are steadily inching closer to the danger zone, Ontario doesn’t seem to be.

The problem is that the value of homes have increased much faster than incomes. The bank says average home resale prices compared with personal incomes are 14 per cent above the long-run trend, up from last summer, although still below the 21 per cent peak that preceded the 1989 crash.

But that is not the case in all markets. Five provinces are currently in the danger zone, led by Saskatchewan, where the ratio is 39 per cent above historic norms.

Also well above the long-run levels is Newfoundland, 34 per cent higher; British Columbia and Manitoba, 31 per cent, and Quebec, 23 per cent above.

By comparison, in Ontario, the price-to-income ratio is only 10 per cent higher than historic norms, suggesting prices are moderately overvalued but not in bubble territory.

Hurray for Toronto—overvalued against historic prices, but not quite as bad as other places. It’s like we’ve been saying: when the collapse of the housing market comes, Toronto may get hit, but we won’t need to stockpile ammo, canned goods and drinking water.

Of course, this also means Toronto shoppers might be able to pick up real estate in other provinces for a song after the crash. Anyone interested in a waterfront property in Regina Beach?

While the housing market is rich from a historical perspective, the Canadian housing market is most likely not in a US style housing bubble circa 2007, pre-GFC (global financial crisis). Sub-prime mortgages, which plagued the US and were ultimately responsible for its collapse, have only been a fraction in Canada respective to the US. That being said, the current low interest rates in Canada are still sufficient to keep housing affordable. Come the second half of the year, when the BOC resumes “normalizing” interest rates, that is when the housing market will most likely be at the turning point.

Real estate has been leveraged to provide a higher standard of living for many households for many years. Unsustainable in the long term. Although the government (with banks input) have averted the crash through low interest rates and policies; eventually there has to be a correction. How far prices decline will depend on how much influence foreign investment and immigration affect prices in Canada. Long term any correction will benefit middle class households.

This has to be one of the most ridiculous, blatant little attempts to keep alive Canada’s dead horse of a housing market. Toronto’s an island, is it? Bottom line: too many people — all over the country — “took advantage” of low interest rates and reckless lending practices not at all unlike what was done in the States, Britain, and Ireland. No one wants to LIVE in a home anymore. No, no — they want to “invest.” Just let it appreciate in value for a while, then easily flip it and make a profit even though the down payment was on credit. No problem. What could go wrong? Gee, I wonder…Maybe nobody buys ’cause it gets too pricey? Maybe the BOC eventually has to raise interest rates? We’ve already seen how this turns out, haven’t we? Or is our collective memory shorter than three years? Homes in all our major cities are far too expensive when you look at what people make. And on top of that, we’ve got historic consumer debt. Toronto’s gotta be one of the worst — everyone wants to pretend they’re rich. Affluenza. This storm will hit Toronto — and with a vengeance.

Buying a house has become a sentimental issue for many immigrant Canadians. People with $10/hour income are buying houses, unethical Real Estate Brokers are arranging bidding wars and arranging mortgage for unqualified buyers. Now most of the buyers (for under $600K houses)has rental income in their calculation already. Many buyers are renting the main floor and living themselves in the basement. They just want to say “I own a house!” They keep their eyes closed that the house is not owned by them, its rather owned by the bank, and the bank is making these buyer work their tail-off to make the banks richer.

In the past several years we have seen the average price of a home triple and in some cases quadriple. Much of this has been caused by government programs to help the average consumer afford a home. When the government reduced the down payment required, the sellers simply raised the price so the actual cash required stayed the same. When the banks lowered interest rates, again the price of housing increased thereby costing the consumer the same.
Home ownership is a priviledge…not a right. In a free market society, we make our own economic decisions of where and what we live in. Quebecers have a preference to rent and house prices are a lot lower in Montreal than the other major cities in Canada.
The amount of interest paid on a given property will by far exceed the profit made by the home builder. A 25 year amortization will result in paying TWO & A HALF TIMES the Original Price of the Home. Banks essentially shuffle paper and contribute nothing to the economy. Banks essentially create currency out of thin air…..which leads to inflation & bubbles.
Our banks in Canada are not a healthy as one many think. 12 non-US banks, out of 20, received a share of the $600 billion bailout. RBC Capital Markets, LLC was one of them. All of the Canadian banks are up to their eyeballs in toxic assets & derivatives that they simply don’t understand.

I personally think that people who are in a mood to sell off their properties, this is the right time to sell, waiting may lead to a drastic dip in the prices and they have to face the music banged by the banks in shape of high mortgage payments.

There are two main forces at play – in the Toronto market – one are the locals who live, work and spend their money here, they cannot afford to buy large homes or condos w/out family help.

The other force is the immigration – Canada has an investor program where new comers may invest in real estate as part of the immigration process. There is an incredible amount of money coming in and that is fueling the increase in prices.

For immigrants from China, India, Pakistan or Iran (the four countries that seems to have the largest chunk of immigrant investors) it is a lot cheaper to acquire Toronto real estate than, say, Mumbai or Shnghai real estate.

The get property at 30-80 cents on the dollar (in comparison to their homelands), and that’s an amazing deal from their perspective, they simply do not care if the prices are up by 10% bc it’s still so cheap in comparison to what they know from home.

Toronto, not in bubble territory? Just look at house prices in Toronto and the quality of houses offered for some of their outrageous prices. A crash is on it’s way. No doubt about it. Do your research and you will see that Toronto is way over due for a major correction in the market, or a complete “pop” of the bubble. I’m sure real estate companies and banks will tell you different…Just more corporate greed! Don’t buy into the corporate hype or their yearly announcements.

This bubble talk is funny. Nobody really knows, and there’s differetn persepctives spewed out everyday. At the end of the day, Toronto migh tbe headed for a bubble, or 500k for a detached house may be a new fact of life – just like the need for a further education after an undergrad, because it’s useless on it’s own. http://www.house-hunting.ca buy with me and I’ll get you a good undervalued property.